Profit and Intrinsic Value

Paul Mason’s interpretation of the long cycles of capitalism relies heavily on the idea that profits tend to fall during the latter half of each cycle. “Fifty-year cycles are the long-term rhythm of the profit system.”

In past cycles, profits have recovered when new waves of innovation have begun, so falling profits have not been as fatal to capitalism as Marx predicted. Mason thinks that the latest wave of innovation will be different.

The key to understanding the rise and fall of profits is the relationship between profit and intrinsic value. Market prices fluctuate, but “there has to be a more intrinsic price around which the selling price moves up or down.” A house is too costly and too useful to sell for the price of a paper clip. Well I say “useful” anyway. Mason would just say “costly in human labor,” since he subscribes to a labor theory of value. I will keep returning to that distinction throughout the discussion, although my difference with Mason doesn’t keep me from reaching many of the same conclusions.

Mason’s crisis theory vs. mainstream economics

In Oscar Wilde’s Lady Windermere’s Fan, one of the characters defines a cynic as “a man who knows the price of everything and the value of nothing.” Mason makes a similar accusation against the economic theory of marginal utility, that “there is no intrinsic value to anything, except what a buyer will pay for it at a given moment.” And so economics becomes preoccupied with “capitalism’s inner tendency towards equilibrium” as prices adjust to fluctuations in supply and demand. Economists have trouble explaining periodic crises, which are dramatic departures from equilibrium.

Without being able to distinguish market price from intrinsic value, mainstream economics also has trouble dealing with social issues like injustice, exploitation, discrimination, fraud, or class struggle. To say that workers have been underpaid or consumers overcharged, one has to judge the price of something against some standard of value. An economic theory that treats the market price as the “right” price is implicitly conservative, although it may hide its conservatism behind a veneer of scientific detachment or value neutrality.

Labor as the standard of value

Mason’s theory of value uses labor as the standard of value, in the tradition of David Ricardo and Karl Marx. Human labor is the source of value, and “a commodity’s value is determined by the average amount of labour hours needed to produce it.”

That has the virtue of simplifying the problem, but I think it leaves too much out. The labor theory focuses on the cost of something in terms of human effort, but not the benefit of something in terms of human need or enjoyment. From the buyer’s perspective, two things produced by similar amounts of labor could have very different use values. Two medical researchers could put in the same hours, but only one might come up with a cure for cancer. When the FDA evaluates a drug, it doesn’t ask how many hours of labor it represents; it asks whether it is safe and effective. Both its cost in labor and its benefit to the consumer can reasonably affect its price.

The greater the human cost of making something, the greater the scarcity and the lower the supply. But the greater the human benefit from making something, the greater the desire to have it and therefore the greater the demand. Considering both sides might seem to bring us back to the conventional free-market view that the only measure of value is the actual price that buyers and sellers negotiate, that is, the equilibrium price where supply and demand meet. However, one can save the idea of intrinsic value by regarding it as the value that buyers and sellers can recognize when the interests of both parties (costs to sellers and benefits to buyers) are fairly represented. To the extent that they are not, then prices will deviate from underlying value.

Why wouldn’t the interests of both parties be fairly represented in a free-market economy? In reality, the free market is a somewhat ideological notion, and participants are not as free as the ideology likes to pretend they are. To understand why, some notions of power and control need to be incorporated into the theory. While mainstream economists have tended either to ignore power or to regard as benign, sociologists have certainly appreciated its darker side. Power can be used cooperatively, on behalf of an entire group or organization, as when a responsible adult exercises economic power on behalf of a child. But where consensus is lacking and collective norms are weak, power is likely to be employed to have one’s way without regard to the interest of others. It is naïve to think that in an unregulated market, concentrated economic power won’t be used to take advantage of the less powerful, by tricking consumers into paying more than a product is worth, or by paying workers less than their labor is worth.

But that brings us to the question, what is the value of labor itself? Here again, the answer depends on whether both sides of a transaction are considered (costs to the sellers of labor and benefits to the buyers of labor), or only the cost side. In Mason’s labor theory of value, the value of a commodity is the labor needed to produce it. So the value of a worker’s labor would be the labor needed to produce that labor, which is the labor performed by other workers to provide whatever the worker in question needs to live and to work. That would be the labor value of labor. This definition of value leads to one conception of a just wage or living wage, the wage needed by the worker to buy not only the means of sheer survival, but the education and other inputs needed to do the work of a modern society.

Again, I find this incomplete because I would want to take into account the use value of labor as well as the labor value of labor. A simple example shows how the failure to do so can lead to illogical valuations. My first job was a summer job doing clerical work in a government office. At first I was slow to complete certain tasks, and I remember one particular occasion when a more experienced worker made a suggestion that allowed me to speed up my work considerably. The use value of my labor certainly clearly increased, but the labor theory would miss that since the labor value of my labor as defined in the previous paragraph wouldn’t have changed.

The use value of labor is its value to the buyer of labor, the consumer or employer. Two workers who require the same support in order to live and to work may differ greatly in their value to the employer. One may be put to work more productively than the other. Employers can add to the use value of labor by innovations in work organization or technology. This has implications for the discussion of profit and the cycles of rising and falling profits.

Where does profit come from?

The labor theory of value takes a rather critical view of profits from the start. Including use value as well as labor value in the discussion changes the picture a bit, although it does not place profits entirely above criticism.

Mason adopts the classic Marxian position that businesses generate profits by extracting surplus value from labor.

If we forget money and measure everything in ‘hours of necessary work’, we can see how profit is generated. If the cost of putting Nazma at the factory gate six days a week is thirty hours work by other people spread across the whole of society (to produce her food, clothing, energy, childcare, housing and so on), and she then works sixty hours a week, her work is providing double the amount of output for the inputs. All the upside goes to the employer. Out of an entirely fair transaction comes an unfair result. This is what Marx calls ‘surplus value’, and is the ultimate source of profit.

Although Mason states the problem in terms of hours, it could also be expressed in terms of wages. The pay required for the worker to purchase the necessary labor of others could be considered a living wage, and profit would come from paying workers less than that wage. Workers put up with this because they are in too weak a bargaining position to be truly free to say no.

Does that mean that workers should receive all the revenue produced by their labor, leaving nothing for capitalist owners and investors? Many socialists have arrived at that conclusion, seeing value only in the labor of an owner-manager, but not in the contribution of capital as such. If capital makes no distinct contribution to value, that makes it rather easy to look forward to the demise of capitalism!

Suppose, however, the owner uses some capital to buy the workers new and improved tools, enabling them to turn out products faster. As in the example where I worked faster in my clerical job, the labor value of the labor hasn’t changed. (The labor value of each unit of product has actually declined, but that’s another matter.) What has changed is the use value of labor, since capital has added value to that. The labor theory of value is blind to this added value, insisting that only labor generates surplus value.

Who should get the profit resulting from this added value? I think that ideally it should be a win-win. The provider of the capital should get a return on capital. But since working with the new tools requires the cooperation of labor, labor should share the rewards as well. This yields a somewhat different conception of a just wage, one that requires giving workers a share of the benefits of their own increasing productivity.

If businesses can add to the use value of labor by innovations in work organization or technology, then the return on capital can be a fair reward for adding value, and not all profit derives from the exploitation of labor. Nevertheless, where workers are weak and unorganized, and social norms governing economic behavior are weak or poorly enforced, capital can derive excess profit from paying workers less than they are worth. That remains true whichever way worth is considered: from the cost side as the labor value of labor, or from the benefit side as the use value of labor. And the theory can also relate power and profit in a vicious circle. The greater the power of capital over labor, the greater the potential for excess profits. Those profits in turn contribute to the accumulation of still more power. The process would continue until the social costs become too great to bear, generating movements for social reform.

Productivity and profits

Hopefully, this theoretical discussion will shed additional light on capitalist cycles and the future of capitalism. Bearing in mind that the cycles are “the long-term rhythm of the profit system,” what happens to profits when capital flows into new industries employing new technologies?

According to the labor theory of value, businesses can profit from new technologies and rising productivity only in the short run. Once a labor-saving technology is fully implemented across an industry, the reduction of labor in that industry will cause profits to fall. That rather strange conclusion follows from the assumption that labor is the sole source of value, and that surplus labor value is the only source of profit. Mason explains:

To increase productivity, we increase the proportion of ‘machine value’ to the living human labour employed. We drive human beings out of the production process and in the short term – at the level of the firm or sector – profits rise. But since labour is the only source of extra value, once an innovation has been rolled out across the whole sector, and a new, lower social average set, there’s less labour and more machine; the part of the operation producing the added value has got smaller; and if unchecked that would place downward pressure on the profit rate of the sector.

If, on the other hand, commodities have a use value as well as a labor value, and profit does not derive solely from exploiting labor, then the explanation for falling profits is less straightforward. In fact, why profits have to fall at all may not be immediately obvious. Consumers who value a particular product may willingly pay just as much for it, whether it’s produced by human labor or by machinery. True, less labor means fewer workers to overwork and underpay; but it also means fewer workers with whom to share the revenues from mechanized production. Productivity gains could translate into corporate profits for a long time.

That means that I have a somewhat more positive view of capitalism, at least during the upswings of long cycles. Capital investments and productivity gains can produce win-win solutions for capital and labor, with both profits and wages rising for many years. That would explain why long-cycle upswings such as the postwar prosperity are periods of relative domestic tranquility and capital-labor accommodation.

Although I do not regard labor-saving technology as inherently unprofitable, as Marxians do, I can see two reasons from a more Keynesian point of view why profits would eventually fall in a mature, more automated industry:

Overproduction: The industry becomes so good at producing goods in high quantity but low cost that it cannot find a big enough market for them.

Under-consumption: The industry reduces its demand for labor to the point that employment and wages fall, leaving too many workers too poor to afford the products being marketed.

Even without Mason’s pure labor theory of value, I can see how mature industries could eventually become victims of their own success in raising productivity and lowering labor costs. Then the rest of Mason’s theory of cycles applies: Profits are threatened, capital tries to compensate by squeezing labor, cooperation breaks down, and eventually social unrest forces the system to adapt. Then in order for capitalism to continue, profits have to be found primarily in new industries.

Profits in a service economy

Today, there is some question of what those new industries would be, since the manufacturing sector is becoming so automated that it can no longer create jobs for the millions of workers entering the global labor force. Last week’s New York Times had a good article by Eduardo Porter, “The Mirage of a Return to Manufacturing Greatness,” questioning Donald Trump’s promise to bring back manufacturing jobs. Porter quotes Joseph Stiglitz, who says, “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount.” Porter draws the logical conclusion that “strategies to restore manufacturing jobs in one country will amount to destroying them in another, in a worldwide zero-sum game.” Putting stiff tariffs on foreign goods, as Donald Trump proposes, is a formula for global conflict, but not global progress.

If there is to be another capitalist upswing in profits and prosperity, it would have to be centered in the service sector of the economy. Mason is pessimistic about turning enough services into paid work to compensate for the decline in manufacturing work.

At a certain level, human life and interaction resist commercialization. An economy in which large numbers of people perform micro-services for each other can exist, but as a form of capitalism it would be highly inefficient and intrinsically low-value. You could pay wages for housework, turn all sexual relationships into paid work, mums with their toddlers in the park could charge each other a penny each time they took turns to push the swings.

As I’ve said before, I expect people with specialized skills to continue to offer their services on the market for the foreseeable future. The more we invest in education and other forms of human capital development, the greater the number of people who will have something valuable to market. But since services by their very nature are labor intensive, there may not be much that financial capital can do to add value and justify a profit. What profits exist in service industries may depend too much on holding down wages, at least until low-wage services are automated too. In this area, the labor theory of surplus value may work very well.

For skilled workers, added value will come primarily from human capital, which will depend on inputs from the community (“It takes a village…”). In order to make those workers dependent on financial capital, capitalists would have to find ways to own the new informational means of production. “Capital has to extend its ownership rights into new areas; it has to own our selfies, our playlists, not just our published academic papers but the research we did to write them. Yet the technology itself gives us the means to resist this, and makes it long-term impossible.” Knowledge is sharable at such low cost that owning it for long is very difficult.

And so we remain poised between an old world of dwindling manufacturing jobs and low-wage service jobs, and a new world of self-capitalized skilled work. There might not be enough such work to keep people as employed as they used to be, but goods and services might be so cheap and abundant that not so much paid work would be necessary anyway. I don’t know whether to call such a system “postcapitalism” or “selfcapitalism” (the spell checker doesn’t like either term), but it certainly will be different.